What Happens If You Default on a Timeshare?

A timeshare default occurs when an owner fails to uphold the financial responsibilities outlined in their timeshare agreement. These obligations typically include regular mortgage payments, if the timeshare was financed, and recurring maintenance fees, which cover the upkeep and operation of the resort. Special assessments, utility fees, and property taxes can also be part of these ongoing financial commitments. Failure to make any of these required payments constitutes a breach of the contract.

This failure to meet contractual terms can initiate actions from the timeshare company or homeowner’s association. Defaulting sets in motion a process with various financial and legal repercussions.

Immediate Consequences of Defaulting

Missing a timeshare payment triggers immediate repercussions, beginning with late fees and penalties. These charges are outlined in the timeshare contract and can quickly accumulate, adding to the outstanding balance. Interest charges on overdue amounts may also be applied, potentially compounding the debt.

Following a missed payment, timeshare companies or their collection agencies will initiate collection attempts. These efforts involve communications like phone calls, emails, and formal letters, aimed at recovering overdue amounts. During this period, timeshare usage rights may be suspended.

Defaulting immediately impacts an owner’s credit report. Even the first missed payment can be reported to credit bureaus, leading to a noticeable drop in the credit score. This initial impact serves as an early indicator of financial distress.

Subsequent missed payments continue to negatively affect the credit score, with 30, 60, and 90-day delinquencies reported. Most developer-financed timeshares will show these delinquencies, signaling to other creditors a higher credit risk. This decline can affect the ability to secure other loans or credit.

Legal Actions by Timeshare Companies

If a timeshare default persists, companies will escalate to formal legal actions. The first step is often a Notice of Default. This formal communication informs the owner of continuous non-payment and the timeshare company’s intent to pursue further legal remedies if the balance is not paid. This notice serves as a precursor to more severe actions.

For deeded timeshares, foreclosure is the most common legal action, similar to residential property foreclosure. The timeshare company can initiate proceedings to reclaim the property interest. This process can be judicial, requiring court intervention, or non-judicial, depending on the timeshare agreement. Foreclosure aims to satisfy the debt by selling the timeshare interest.

Even if a timeshare mortgage is paid, an owner can still face foreclosure for failing to pay ongoing maintenance fees, special assessments, or taxes. These are continuous obligations. If a timeshare company obtains a lien due to unpaid assessments, they can foreclose on that lien. The foreclosure process varies in length, but its outcome is the loss of the timeshare interest.

Timeshare companies may also file a lawsuit to obtain a judgment for outstanding debt. This is common with “right-to-use” contracts, where there isn’t a deeded property interest to foreclose, or when a deficiency judgment is pursued after foreclosure. A lawsuit seeks a court order compelling the owner to pay the debt. If successful, the company can then use various legal means to collect on the judgment.

Financial and Tax Implications After Default

After a timeshare default process, such as foreclosure or debt settlement, has concluded, specific financial and tax implications arise. One significant consequence can be a deficiency judgment. This occurs when the sale price of a foreclosed timeshare is less than the total amount of debt owed by the owner. The difference between the sale price and the outstanding debt is the “deficiency,” for which the timeshare company may seek a personal judgment against the former owner.

If a deficiency judgment is obtained, the timeshare company can then pursue collection of this amount through various legal avenues. These can include wage garnishment, bank account levies, or placing liens on other assets the individual owns. The ability to pursue a deficiency judgment depends on the terms of the original contract and general legal principles, but it represents a continued financial liability even after losing the timeshare.

Another important implication is the potential for taxable income from canceled debt, reported on IRS Form 1099-C. If a timeshare debt is canceled or forgiven, such as through a foreclosure where the remaining balance is waived or a negotiated settlement, the forgiven amount might be considered taxable income by the Internal Revenue Service. The timeshare company may issue a Form 1099-C, “Cancellation of Debt,” to the former owner and the IRS, indicating the amount of debt that was canceled. This could lead to an unexpected tax liability for the year the debt was forgiven.

The long-term impact on an individual’s credit report is also substantial after a timeshare foreclosure or significant debt settlement. A foreclosure can remain on a credit report for up to seven years, severely affecting creditworthiness. This goes beyond the initial credit score drop from missed payments and signals to future lenders a higher risk. Such an entry can make it more challenging to obtain new loans, mortgages, or even rent housing for an extended period.